Shenzhen Court Convicts Software Pirates: A Cause for Cautious Optismism (Republish)

On December 31, 2008, a criminal court in the Futian District of the southern city of Shenzhen convicted 11 suspects charged with pirating Microsoft software.  Besides the criminal convictions, the Court also handed out hefty fines to some of the criminals.  The result of this case surprised many, and was welcomed, of course, by Microsoft Corporation and many intellectual property holders that do or want to do business in China.  In part, I agree this is a great case to celebrate for the enforcement of IP laws in China, I am only cautiously optimistic about the progress that China is making in the overall enforcement of its otherwise strong laws.

The following provides the background information for this post:

Wang and his counterfeit ring were found to have made illicit gains of 1.9 million yuan by counterfeiting 15,000 disks of Microsoft software and distributing 54,837 disks, said the statement.

On Dec. 31, Wang was sentenced to six and a-half years in prison with a fine of 1.5 million yuan.

China’s Criminal Law defines “especially grave violations of copyright” as those involving 2,500 or more copies. Violators could be sentenced to three to seven years in jail. Suspects in similar cases could face up to five years in prison in the United States.

Zhang and Che were sentenced to five years and three and a-half years in jail, respectively, with fines of 400,000 yuan and 800,000 yuan. Eight other offenders were jailed for 18 months to three and a half years.

The verdict was arrived at under the Criminal Law and two judicial explanations on criminal cases of violation of intellectual property rights by the Supreme People’s Court and Supreme People’s Procuratorate, the statement said.

There is no doubt that software piracy is a tremendous legal and economic problem for China and for the business community.  There is also no doubt that China does have the necessary laws and regulations already in place, protecting property rights in software by imposing monetary fines and even criminal punishment.  However, as is well known, the problem always lies in enforcement.

For example, as far as the legal infrastructure is concerned, China has the following (to name just a few) that directly deal with criminalizing software piracy:

a.    Copyright Law of China (2001), see Articles 47, 48;

b.    Regulations on Computer Software Protection (2002), see Articles 23, 24;

c.    Criminal Law of China (1997), see Articles 213-220.

d.   IP Infringement Criminal Thresholds (2004).

Basically, China’s got all the laws on paper that will make all software owners’ hearts sing.  But, as many commentators have suggested, software piracy is not simply a legal problem that can be addressed by a few pieces of legislation and a host of regulations and judicial interpretations.  That is why piracy is so rampant in China, almost everywhere in the nation, despite all the progress China has made on IP protection.

Now, the Shenzhen Court has put a bunch of software pirates out of business and has given a number of them jail time.  Does this suggest a breakthrough in enforcing software rights in China? Or does it still represent yet another critical step in China’s long march towards becoming a serious software protector?  Views diverge on this.  For instance,

Li Shunde, a legal scholar who heads the Chinese Academy of Social Sciences Intellectual Property Research Center, told Xinhua: “This [case] shows China’s sincerity in implementing intellectual property law enforcement.”

Mr. Li regards this case as a prime example of China’s “sincerity” and real action in enforcing software law enforcement.  But I respectfully disagree.  I think this case serves as an example of what China can do when under intense international pressure.  The fact that Microsoft and FBI were involved in the initial busting of the convicted should not be lost on readers.  Further, this case shows what the city of Shenzhen has chosen to do to fight software piracy.  Long regarded as a manufacturing powerhouse, Shenzhen has been trying to transform itself to be the next high-tech city in China.  Shutting down a piracy ring within jurisdiction of Shenzhen is a good additional step towards providing the necessary infrastructure to incubate the rebirth of the new high-tech Shenzhen.  But, equating the progress made in this southern pearl of a city to that of the entire country is unrealistic and exaggerating.  The fact is that much of China has much to do to catch up with what this Shenzhen Court has done.

Zhejiang Courts Making a Mark on China's IP Law (Republish)

Over the years, folks familiar with China’s IP laws know in general that courts in Beijing, Shanghai, and Guangdong are pretty good.  These courts are good for many reasons: the judges are well trained and versed in intellectual property laws; the judges make reasonable decisions; the courts are not terribly biased toward foreign parties.  Overall, foreign IPR holders are more likely to have a fair trial in courts situated in these locales. 

However, I have noticed another trend–IP courts in the eastern province of Zhejiang are also making noticeable decisions as well.  In fact, in a conversation with Toronto-based international lawyer, Paul Jones, both of us were pretty impressed by the some of the courts in Zhejiang because the judges seem to “get it.”

A recent piece out of the American Daily confirmed my observation and hunch about the Zhejiang Courts.  In that piece, the author notes:

For years, foreign companies have complained that patent and trademark infringers in China are treated too lightly. With damages typically capped at 500,000 yuan ($73,000), actual awards are often much lower.

But some courts in China’s Zhejiang province have recently gotten tough, ordering high-profile infringers to pay millions of dollars in damages. Unfortunately for multinational corporations, the verdicts have all been against them.

Last month, Samsung Corp. was ordered by a Zhejiang court to pay 50 million yuan ($7.3 million) for infringing  local company Holley Communication’s cell phone technology patent. Earlier in 2008 another Zhejiang court ordered well-known Hong Kong clothing chain G2000 to pay 20 million yuan ($2.9 million) for violating a local entrepreneur’s “2000″ trademark. In 2007 brewer Zhejiang Lanye won a 3 million yuan ($439,000) judgment against Pepsi over the latter’s use of the phrase “blue storm” in a marketing campaign.

These verdicts follow the most closely watched case of all: In September 2007 France’s Schneider Electric was ordered to pay a whopping 334.8 million yuan ($49 million) for violating Wenzhou-based CHINT Group’s circuit breaker patent. Schneider says the damages are more than 20 times greater than the next-highest award by a Chinese court in a similar case.

China Business Law Blog discussed most of the cases in the past.  Read the post about Lanye here, where I analyzed why the Court held in favor of a little known brewer and against the American beverage giant Pepsi.  Read the post about G2000 here and here , where I analyzed how G2000 fell short in protecting its trademark rights by not registering for a wider range of goods and the bitter fruit of that failure.  Taken as a whole, the four notable IP cases out of Zhejiang Province all bear the same remarkable characteristic–very large award for damages.  The $49 million hit against Schneider Electric is a pretty hefty chunk of money to fork over for any IPR holder, in any jurisdiction.

So, what do all these cases out of Zhejiang mean?  Will the Zhejiang courts lead the way for large awards in IP infringement cases in China?  So far, we know that three of the cases referred to above have not been reversed/remanded yet, and that means the Zhejiang courts will likely continue to hand out heavy fines for IP infringements.  However, as suggested by the American Daily article, the large fines have so far been levied against foreign/Hong Kong defendants, which tends to lead one to conclude that the Zhejiang courts hold foreign IP infringers to a higher standard, thus subjecting them to harsher penalties.  We don’t know yet, if and when given an opportunity, if the Zhejiang courts will be willing to levy harsh fines against Chinese infringers where the circumstances require as such.  

Assuming that the courts do not, then this local favoritism will not go challenged.  When the Chinese courts do adhere to the 500,000 RMB damage limit, foreigners cried foul.  Now, when the Chinese courts do hand out much larger fines, as had been wished for by foreigners, foreigners held accountable cry foul too.  Of course, this complaint is a legitimate one if there is indeed local favoritism.  To confirm, a comprehensive study based on statistics is warranted.  However, if no study or reliable data can confirm that the Zhejiang courts are biased, then foreign IP holders really have a problem themselves because they cannot have the best of both worlds on the damage issue.

I see that the Supreme People’s Court may need to speak up once again on damages in IP lawsuits.